Earthquake, Tsunami Spark Concern Over Consumer Electronics

Difficulty in Getting Parts Could Have Long-term Impact on $873 Billion Business Worldwide

The devastating earthquake and tsunami in Japan threatens to cast a long shadow on the consumer-electronics industry, an $873 billion business worldwide. With widespread damage, electricity shortages, transportation problems and unresolved issues relating to its nuclear power plants, the impact on the industry is almost certain to have repercussions well beyond Japan's borders, including the $165 billion U.S. consumer-electronics industry.

That's because while the final assembly of most consumer electronics happens outside of Japan, in places such as Korea, Taiwan and China, Japanese companies make many of the parts that go into those finished products. Japan alone supplies about 60% of the world's silicon used to make semiconductor chips, according to IHS iSuppli.

With productivity slowed as the country responds to the disaster, there is a likelihood of shortages for parts that could cause price increases and, potentially later on, a scarcity of product that could stretch into the crucial holiday season.

Sony, Nintendo, Panasonic, Canon, Nikon and other Japanese-based electronics companies temporarily shut down operations and are pledging millions of dollars and supplies in aid. As some plants remain closed and others face electrical and personnel shortages, industry analysts and insiders are beginning to speculate on what will happen next.

Some manufacturers have already issued broad statements regarding the impact -- Texas Instruments warned that damage to its chip plants would hurt its sales in the first two quarters; Sony Ericsson told Dow Jones newswire it would be affected by supply problems, although it declined details. Several video-game developers, including Nintendo, Capcom and Konami, have delayed new game releases, although a Nintendo spokeswoman said the earthquake may not have been to blame as games are often delayed for many reasons. Marketers contacted by Ad Age were unable to comment specifically or speak for their Japanese headquarters, given the continuing nature of the tragedy.

Analysts generally agree that the short-term impact -- for the next month or two -- likely won't be severe thanks to excess inventory of parts and components already in the supply chain. However, iSupply said electronic distributors are reporting a surge in orders from original equipment manufacturers, trying to ensure they have sufficient inventory on hand to ride out any interruption in supply.

It's the long-term effect of a prolonged supply-chain disruption caused by power and workforce interruptions that is more worrisome.

"A lot of products get designed and a lot of product management comes out of Japan. And if there are long-term societal disruptions -- people not being able to get to work, for instance -- that could have a bigger impact on new products, upgrades and new features of products," said Steve Baker, NPD Group analyst. "By the holiday time frame, it could be that products couldn't get finished because personnel couldn't get to work."

IHS iSuppli reported that the "earthquake and tsunami could result in significant shortages of certain electronic components, potentially causing pricing for these devices to increase dramatically." While short-term supplies are stable, there has already been a psychological effect. ISupply noted as much as a 10% increase in spot market pricing for NAND flash memory (used in USB and solid state drives). It expects price increases to spread to other components and assembled products if both panic about supply shortages and actual shortages continue.

Other key components made in Japan such as lithium ion batteries -- Sony, Hitachi, and Sanyo have all closed battery-manufacturing plants temporarily -- and several that are important in LCD displays, are causing some concern as well. "To some degree or another, every company in tech will be affected. Big firms have the resource to weather this, but if you lose enough small suppliers, and some of them are very unique, it could have a big effect," said Rob Enderle of the Enderle Group.

Shawn DuBravac, chief economist for the Consumer Electronics Association, downplayed such fears. He said about 15% of the manufacturing sales in consumer electronics comes from Japan, although that is higher for semiconductor wafer production, ranging from 30% to 50%. Of those companies, about 20% are "offline" because of the disaster.

However, he added, it is unlikely that whole product segments will be disrupted because "nothing is heavily concentrated in Northern Japan that isn't being produced elsewhere. ... There will be spot shortages maybe, but spot shortages will affect models, not entire product categories."